Tariffs may shape inflation far differently than standard economic models predict, according to a new working paper from two San Francisco Fed researchers. Their findings suggest the impact of trade barriers is more complex than previously understood.
Tariffs Linked To Slower Growth, Lower Inflation
The study, which analyzed 150 years of tariffs, conducted by Régis Barnichon and Aayush Singh, suggests that tariffs can lead to reduced economic activity, higher unemployment, and lower inflation in the short term. This contradicts the predictions of standard economic models, which suggest that tariff increases should lead to higher Consumer Price Index (CPI) inflation.
The researchers proposed two potential explanations for this phenomenon. Firstly, tariffs may create uncertainty, affecting consumer and investor confidence, thereby depressing economic activity and reducing inflation. Secondly, tariffs could cause a drop in asset prices, further impacting demand, and leading to higher unemployment and muted inflation.
"Instead, tariff shocks appear to act as aggregate demand shocks—moving inflation and unemployment in the same directions,” they wrote.
The study found that before World War II, a permanent 4-point increase in tariff rates lowered inflation by 2 percentage points and increased unemployment by roughly 1 point. While post-war estimates are less precise, the results still suggest that higher tariffs tend to push inflation down and unemployment up.
Notably, in June, Federal Reserve Chairman Jerome Powell blamed President Donald Trump‘s tariffs for inflation, a stance widely debated by analysts.
Tariff Rollback With Mid-Terms In Focus?
These findings also align with the predictions made by some economists earlier in the year. In October, LPL chief economist Jeffrey Roach suggested that U.S. companies were more likely to absorb the costs of Trump’s tariffs rather than passing them on to consumers, which could reduce the risk of inflation and influence Fed policy.
Also, the study’s findings are particularly significant in the context of recent events. Just a few days ago, Trump rolled back tariffs on several agricultural imports, including beef, coffee, and bananas, to alleviate the pressure of rising prices.
Bernard Yaros, lead U.S. economist at Oxford Economics, said on Friday that Trump’s tariff rollback will have little impact on inflation as imported food constitutes merely 10% of U.S. households’ consumption. However, this move can be seen as a response to the growing concern over the cost-of-living crisis, which is likely to have a significant impact on the 2026 midterm elections.
Bank of America strategist Michael Hartnett, a fall in inflation to 2% could lift Trump's approval above 45%, while inflation closer to 4% could push his rating below 40% ahead of the 2026 midterms. September's CPI report showed headline inflation rising to 3% year-over-year, coming in just under the 3.1% forecast. Core inflation eased from 3.1% to 3%, with a modest 0.2% monthly gain—also softer than expected.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
